Looks, brains and brand – what makes a business attractive?

IT’S official. Companies with good succession management are more likely to stay in business and achieve their dream exit than those who don’t.

The 10 year long study commissioned by AM Azure Consulting examined the impact of succession management on organisational success and identified that proactive succession planning was a key factor in shaping corporate survival and success.

The results are indeed compelling. Succession management did make a difference: positive succession outcomes shaped success and a lack of proactive succession contributed to decline. Organisations lacking effective succession management were five times more likely to disappear than those that had established robust practices and high-impact succession organisations were three times more likely to succeed than those organisations reporting limited practice in 1998.

Out of the 60% that survived their original ownership profile however, only a quarter could be described as “succeeding” indicating that many organisations may be approaching succession planning in the wrong way or implementing practices and processes that are failing to hit the mark.

According to the research it’s not enough to invest in an infrastructure of high potential assessment, general management training and development, succession reviews and information technology. However, those that had made more senior executive appointments from within, which managed retention proactively, and had built flexibility within the executive population, were more likely to survive and succeed.

entrepreneurs and business peopleOther key drivers of survival and success included the development of specialist expertise to build high levels of technical know-how and a targeted management development strategy to focus effort selectively on key individuals rather than any attempt to build capability throughout the management ranks. Indeed leadership is key to good succession management as highlighted by the research, which shows that low levels of visionary and entrepreneurial leadership reduced the chances of survival. Moreover organisations with higher levels of leadership capability in trouble shooting and the management of people processes doubled the chances of succeeding.

But it’s not just internal factors that count. A solid understanding of succession options is just as important yet research by The Royal Bank of Scotland (RBS) reveals that SMEs have a lack of understanding of the corporate finance options available when it comes to selling the business.

Although two-thirds understood to some extent what is involved in a management buyout (MBO), familiarity dropped rapidly with respect to other options which include cash outs, management buy-ins, earn outs or a flotation on AIM. While most of the business owners interviewed considered their businesses in good shape for a sale, many of those rejecting the idea of an MBO stated a lack of good management resource in their company (12%), with 33% believing that their staff could not raise the necessary finance to conclude a deal.

According to Marc Shirman, director, structured debt solutions for RBS in the Yorkshire and the North East, business owners should seek advice from a whole series of financial advisors to enable them to fully understand the options available to them.

“The research within this report has clearly identified that SME business owners require help with realising the value of their lifetime of work. The sale of a business is a life changing process and therefore it is important that business owners enter the sale process for the right reasons and sell for the right purposes,” he adds.

For most owner/managers exit is about money even if the reasons behind the decision are numerous and varied. But it seems that expectations aren’t always grounded. Although the average return on capital for businesses interviewed by RBS was around 10,000% of original investments, 30% of business owners had no idea what their business was worth.

contract signingIt’s a tricky areas on one that causes no end of confusion. Different models of calculation exist such as multiples of earnings, net asset value, breakdown valuations and discounted cashflow. However, as RBS quotes in its study, an accountant’s valuation and the price actually achieved often have little in common.
“Expectations have to be realistic,” warns Shirman.

“Statistics show that 10,000% is around the average return on exit, but many owner/managers feel that their business is worth much more.

“However, the current credit crisis means that valuations have changed. I think people are still in denial about this though.”

Shirman also believes that managers should resist the temptation to take the money and run following a sale choosing instead a gradual handover of responsibilities to aid the new management team in their decisions.

“I think in the current climate there are going to be more deals where the exiting owner/manager will retain a non-controlling minority interest.”

Readiness for exit is one issue – attractiveness is another. While there are any number of reasons a potential buyer might have their eyes on company; breaking into new markets, expanding existing ones, adding new services or simply because of the quality of management.

“Companies are going to have to look closely at their businesses as potential buyers will be scrutinising for potential issues. For example, only having one big client or supplying just one specific market could put buyers off as it exposes the business to greater potential risk. After all, if Lehman can go then anyone firm can,” suggests Shirman.

“Some sectors will be hit more than others. So if your business specialises in shop fitting a down turn in the retail sector will have an effect. Diversification into commercial property would be a way of mitigating this.

“Another issue that owner/managers need to tackle prior to a sale is what’s on the balance sheet. You don’t want something to crop up in due diligence to put people off. Therefore you want it to look as clean as possible.

“Historical debt I think will increasingly become an issue. Just as with personal debt, corporate debt has also grown significantly as for the last few years it’s been very easy to access.”

It’s not just potential buyers that could be turned off a purchase. According to Shirman corporate backers are also looking for assurances, particularly quality management.

“If there wasn’t a good management team we wouldn’t be interested in backing the deal even if it was a good business,” he says matter of fact.

Patrick Abel, corporate finance partner at PKF, based in Sheffield, agrees:

“In an economic downturn, there will always be winners and losers, but it’s often the most forward-thinking companies that will pull through, as they have planned for the future, even during the uncertain times. In difficult periods companies that haven’t planned for succession are often forced down a route such as being taken over, rather than choosing their own path.

“Most companies have a life cycle, and therefore to remain competitive they need to constantly look at ways to remain competitive, succession planning should therefore be an integral part of the company’s planning process.”

According to Abel selling to the right buyer can inject purposefulness and direction into a business.

“While some companies can flourish through being passed from generation to generation, it can also be their downfall. Owner managers need to consider whether it would more beneficial for the business to be sold to its management team or to bring in new management to lead such a buyout, who can contribute new ideas and add fresh impetus, in order to the take the business forward.”

As the financial crisis continues to impact every corporate nook and cranny predicting deal flow and successful exits is impossible. But although it may no longer be a boom market the opportunities are there. Succession management ensures that you’ll be ready to take advantage of them.


AIM/flotation – a form of public listing, which is generally less onerous and expensive than a full listing.
BIMBO (management buy-in, management buyout) – a combination of outside managers and current employees buying the business.
Cash-out – taking cash out of a company through bank loans and other means.
Earn-out – a provision written into a transaction that states the vendors will receive further payment if the business that have sold achieves specified performance levels.
MBI (management buy-in) – an outside team of managers invests in the business
MBO (management buyout) – incumbent management team takes over
Trade sale – where the company is sold to a competitor or other firm
VIMBO (vendor initiated management buyout) – a management buyout initiated by the vendors.
For a copy of the report “Beyond Tomorrow” contact RBS.

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